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Topics in Economic Theory III: The of Power

2020-2021 Academic Year Master of Research in , Finance and Management

1. Description of the subject

Topics in Economic Theory III Code: 32076 Total credits: 3 ECTS Workload: 75 hours Term: 2nd Type of subject: Optative Department of Economics and Business Teaching team: Jan Eeckhout

2. Teaching guide

Introduction

There is a sharp rise in in the aggregate economy since 1980. First, we analyze the measurement of market power in the macroeconomy using the cost-based method, and document how the of markups and profits has changed. We compare markups and profits to other measures such as concentration indices (e.g., Herfindahl–Hirschman , HHI). Then we evaluate the consequences of market power on the economy as a whole and the labor market in particular. We aim to explain a number of secular trends that coincide with the rise of market power: a decline in the labor share, stagnation, declining labor mobility, the decline of startups, and the rise of superstar firms. Next, we build a macro model of the economy where firms have market power in their local markets. We use the model to quantity the role of market power and the possible causes, between the and technological change. We then measure and model monopsony power, i.e., market power in the labor market. Finally, we evaluate the impact of market power on wage inequality, and on the skill premium in particular. The objective is to estimate these models using micro data, and we will back out the distribution of firm productivities, firm markups (markdowns) as well as the market structure. We thus treat the market structure as a residual in the way we treat productivity as the residual. The objective of this course is to provide you with a set of ideas and tools that you can use in your research, whatever you study: macro economics, applied micro, micro theory, , public finance, , development, ,... Hopefully this will be helpful in writing a chapter of your thesis. At the end of the course, you will write a short paper on a topic of your choice related to the course.

Course Outline

Below is an outline of the topics I will cover, as well as an extensive list of references. In the lectures we will cover a selection of these papers in detail. I have also written a general audience, non-academic book on the topic (Eeckhout J., Work in Modern Times, Princeton, 2021) that will come out in February.

1. Measuring Markups

2. The Macroeconomic Consequences of Market Power

3. Quantifying Market Power

4. Monopsony Power

5. Market Power and Wage Inequality

6. Estimating Macro Market Structure

2 References

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AUTOR, D., D. DORN, L. F. KATZ, C. PATTERSON, AND J. VAN REENEN (2020): “The Fall of the Labor Share and the Rise of Superstar Firms,” Quarterly Journal of Economics, 135, 645–709.

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3 CARvALHO, V. M., AND B. GRASSI (2019): “Large firm dynamics and the ,” American Economic Review, 109(4), 1375–1425.

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Discussion paper, National Bureau of Economic Research. (2020): “Global Market Power,” Working Paper.

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DEB, S., J. EECKHOUT, A. PATEL, AND L. WARREN (2020): “The Contribution of Market Power to Wage Inequality,” Discussion paper, UPF mimeo.

DEB, S., J. EECKHOUT, AND L. WARREN (2020): “Market Power and Monopsony in Macroeconomic Equilibrium,” Discussion paper, UPF mimeo.

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PATEL, A. (2020): “Firms, Job Polarization and Biased Technological Change,” mimeo.

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Topics in Economic Theory III

TRAINA, J. (2018): “Is Aggregate Market Power Increasing? Production Trends using Financial Statements,” Chicago Booth mimeo.

VLAchos, J., E. LINDQVIST, AND C. HAKANSON (2015): “Firms and skills: the evolution of worker sorting!,” Discussion paper, Stockholm.

Teaching methodology

Lecture format with small group discussion

Assessment

Short Paper

Grading system

0-10:

0-4.5 Fail 5-6 C 6.5-7.5 B 8-9 A 9.5-10 A+

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